Understanding why brand reputation may be a barrier to entry
A brand can act as an entry barrier when they make customers loyal to existing firms. A new firm entering may have a hard time gaining customers because the new firm lacks the brand image that existing firms have. Customers may prefer to buy from companies that are established and can be relied upon based upon the reputation that they have created.
If it is difficult for new firms to establish a comparable brand image, then they may be locked out of the market, unable to convince customers to make the switch to a firm lacking that brand image.
Situations where brand reputation may act as a large entry barrier
Some situations when brand can act as a particularly strong barrier to entry include:
Customers who are very brand concious
One situation where the brand may pose a significant barrier to entry is when customers have a particularly strong preference for branded goods. This could be because of the image (for example in the fashion area), or because companies only want to buy from firms with an established reputation.
Substantial annual spend on the brand
Another indication of a situation where brands can pose a substantial barrier to entry is when they spend substantial amounts on the brand image through marketing. A new firm may struggle to compete with the budgets of more established companies.
Substantial accumulated historical spend on the brand
Beyond the amount spent on a brand in a given year, new firms also need to compete with the historical spending of companies on their brands. It is not just the instantaneous marketing spend that new firms are faced with, but also the accumulated spend that existing firms have put into building their image over many years.
Brand underpinned by successes that are hard to replicate
A final aspect that may pose a challenge to new firms entering a market is if the brand is based on prior successes. While marketing spends may be a barrier in itself, if the reputation of the companies competing against is based on prior successes, this itself can pose a significant challenge for new firms to overcome. It is possible that new firms may have the capital to put into marketing, but having an established track record is an area that they may be particularly difficult to overcome.